Oklahoma’s STACK formation bodes well for Newfield Exploration
Wells in Oklahoma's liquid-rich STACK formation are generating a decent return at current commodity prices
Jody Chudley is is a contributor to Agora Financial’s Outstanding Investments and Real Wealth Trader.
by Jody Chudley
It is called the “STACK” and it has emerged as one of the better oil and gas plays in North America. By “better” I mean that drilling wells in it can actually generate a decent return at current commodity prices. That is the point, after all, isn’t it?
The STACK is part of the Anadarko Basin, which stretches across much of Oklahoma and a portion of Texas. The STACK’s in Oklahoma, and the acronym stands for “Sooner Trend, Anadarko Basin, Canadian and Kingfisher counties,” so you can see why the acronym is used.
This isn’t really an oil play, it’s more of a combo play. Forty per cent of production is oil, 30 per cent is natural gas liquids and the rest is natural gas. The strong liquids weighting is what creates the attractive economics.
Companies operating in the play believe there may eventually be up to 10 reservoirs that could be developed. The current boundaries of the play cover 2.4 million acres, but I wouldn’t be surprised to see that expanded significantly as the industry keeps experimenting with well designs and acreage.
Newfield Exploration (NYSE: NFX)
Talk about a transformation. Realizing the potential of Oklahoma’s horizontal plays led Newfield to sell off other assets and turn the entire focus of the company to the state. It is no coincidence that Newfield’s share price is actually higher than it was in 2014. How many oil producers can say that?
Newfield’s Oklahoma assets work at current commodity prices and the market has figured that out. The company believes that at $45 WTI oil and $3.00/mcf natural gas, wells drilled into the STACK generate rates of return of roughly 60 per cent.
That isn’t an incredible rate of return for drilling an oil or gas well, but remember this is what these wells generate at very low oil prices. If we get to $55 WTI the rate of return moves closer to 100 per cent and at $65 it is more like 140 per cent.
For some perspective on how other plays compare, consider what Continental Resources is doing. Continental’s CEO, Harold Hamm, is known as the “Bakken Billionaire” because of the company’s massive land position and production base in the play. These days, Continental is choosing not to put already-drilled Bakken wells into production because they don’t generate a sufficient return on investment. Instead, the only wells Continental has been drilling and putting into production are located in the STACK and a similar Oklahoma play, the SCOOP.
Newfield’s second quarter production in the Anadarko Basin was 83,000 barrels of oil equivalent per day. That is an increase of 53 per cent from the prior quarter. Not all of it is from the STACK, but that is the portion that is growing. The company recently announced the sale of its Eagle Ford and South Texas assets for $390 million. The proceeds are sure to be directed into the company’s Oklahoma assets.
Newfield’s balance sheet is in fine shape with a debt to EBITDA ratio of two times. The company has no debt maturities to deal with for six years and has ample liquidity.
The exciting thing is that this STACK play is still young. Newfield is working towards driving well and completion costs down to $5 million per location. This would make the play work at sub-$40 oil and mean that it is a money printing machine at $60-plus oil prices with current service-industry pricing.
When oil was $90 per barrel, the name of the game in the shale oil business was to get your hands on as much money as you could and drill as fast as possible. Capital was easy to come by with lenders lining up to hand out money and institutions happy to provide support. The stock market rewarded production growth ahead of all else, so it was hard not to join the party.
Today what matters, and what should have always mattered, is being able to live within cash flow and hopefully grow a little bit while doing so. The percentage of rigs active in the Bakken and Eagle Ford has shrunk dramatically. The Permian Basin and the STACK have been the two regions that have seen their percentages grow.
It doesn’t take a rocket scientist to figure out why. These are the plays that are worth drilling today. As an investor, unless you are certain that oil prices are going to soar, the best companies to invest in are the ones that have the ability to drill profitable wells at current oil prices, even if they do look more expensive.